TLE PACA and Freight Claims Blog

When a Rebate Isn’t a Rebate under PACA

Meuers Law Firm v. Reasor’s, LLC is a recent case from the United States Court of Appeals for the Tenth Circuit that addresses an interesting issue under the Perishable Agricultural Commodities Act (PACA), i.e., whether PACA creditors who are beneficiaries of the PACA trust can recover from a PACA debtor amounts that the debtor claimed were rebates due under its contractual arrangement with the creditor. Put another way, in an action under PACA between a supplier of produce and a buyer, can the buyer claim a credit for amounts that it claimed were due it from the supplier as rebates for purchases made?

The majority (2-1) opinion held that both under PACA and under common law trust principles a debtor cannot claim a set-off for alleged rebates due. In a lengthy and scholarly opinion the judges held that the claimed set-offs were not transfers “for value,” and therefore the debtor was not a bona fide purchaser. The supplier was entitled to recover the full amount of its claim, and the debtor could not reduce that amount by subtracting from it the amounts of the rebates to which it believed it was entitled.

In a vigorous and lengthy dissent, Judge Carson, relying on a case from the Second Circuit, opined that because the rebates were not prohibited or unlawful under PACA there is no reason why they should not be credited against the full amount claimed by the supplier. While the dissent’s reasoning is initially appealing, if not entirely convincing, it was undermined, as the majority contended, by a subsequent decision from the Second Circuit Court of Appeals that cast doubt on whether the earlier decision was still good law. Even the dissent seemed to admit this, when it stated that, “the Second Circuit got it right the first time around,” thereby implying that the later case, cited by the majority, was indeed contrary to the Second Circuit’s earlier opinion upon which the dissent was in large part based.

H.C. Schmieding Produce Company, LLC v. Lurie Brothers, LLC, et al (N.D. Ill)

Last month H.C. Schmieding Produce Company, LLC (“Schmieding”) of Springdale, Arkansas filed a Perishable Agricultural Commodities Act (PACA) lawsuit in the United States District Court for the Northern District of Illinois against Lurie Brothers, LLC (“Lurie”) of Chicago and several individual defendants (Case. No. 1:19-cv-07933).

Over the course of six weeks in 2018, Schmieding allegedly sold Lurie wholesale quantities of produce for which a balance of about $26,000 allegedly remains due and owing.  Schmieding seeks damages from Lurie, plus pre-judgment interest, costs and attorneys’ fees, and the imposition of personal liability for same upon each of the four named individual defendants.    

The case has been assigned to the Honorable Elaine E. Bucklo.

PACA, Poor Recordkeeping & Personal Liability

Earlier this year Judge William H. Pauley III of the United States District Court for the Southern District of New York issued an opinion in a case involving claims under the Perishable Agricultural Commodities Act (“PACA”) by a produce wholesaler (“Moza”) against another wholesaler (“Tumi”) and several of Tumi’s officers and agents.

Moza claimed it was owed $222,709.93 for unpaid bills for produce shipped to Tumi and for certain freight charges. Moza also contended it was entitled to prejudgment interest on the amounts claimed.

The court noted that neither party was “adept at recordkeeping, and the evidence at trial was disorganized.” Much of the oral testimony was contradictory, so the judge had his hands full trying to determine who was right and who was wrong.

Without getting into the details of each particular claim, which involved about two dozen separate shipments and sales, the primary issues before the court were:

  1. Whether Moza, the seller, received full payment, and was entitled to reimbursement for freight charges.
  2. Whether Moza preserved its PACA trust rights.
  3. Whether the individual defendants, and a successor corporate defendant, were liable under PACA.
  4. Whether Moza was entitled to pre-judgment interest.

As to (1) above, the court concluded, contrary to Tumi’s arguments, that as to shipments that were allegedly inspected by the USDA and found wanting, Tumi failed to prove its case that Moza either agreed to accept lesser amounts for such shipments, or that according to industry custom and usage payment of lesser amounts was warranted.

With respect to transactions paid with cash, the court found that the invoices which provided that Moza would accept lesser amounts were not reliable, particularly in the face of the testimony of Moza’s agent that his signature on such invoices had been forged.

With respect to transactions involving revised invoices for increased amounts of produce shipped, the court found that Moza had met its burden of showing that such transactions had in fact occurred and that Moza was entitled to full payments of such revised invoices.

The court also found that where Tumi had failed to offer any evidence of payment of certain invoices, all of those invoices remained due.

However, as to Moza’s claim for freight charges, the court found that because Tumi never agreed to the payment of freight charges with respect to its transactions with Moza, Moza could not recover for the same.

As to (2) above, the court found that Moza had preserved its PACA trust rights by including on its invoices the requisite PACA language. The judge rejected Tumi’s argument that Moza failed to prove that it protected its PACA rights because it did not prove at trial when the invoices were created and when they were served on Tumi. The judge noted that Moza ”was not required to show delivery of the invoices beyond a metaphysical doubt.” The testimony of Moza’a agent that the invoices were delivered to Tumi normally within a day after the produce was shipped was sufficient.

Regarding (3) above, the court found that the company’s principal, who conceded that she controlled Tumi’s finances, and who signed payment checks to Moza, was personally liable as a person who was in the position to control the assets of the PACA trust and who failed to preserve them.
As to another person, “Mike,” who was not on the PACA license as a principal, and who was not an officer or director of Tumi, and who did not have authority to write checks or make withdrawals from the corporate bank account, and who described himself as only a salesman, the court nonetheless held him to be personally liable. The court noted that the evidence showed that Mike was the person who had almost all of the contact with Moza. It also did not help his case when Moza’s agent testified that Tumi’s principal told him, with respect to his inquiries about short payment checks, that he should “talk to Mike, that’s between you and Mike; I just write the check.” The court also noted that a string of text messages corroborated that testimony.

As to a third individual, “William,” the judge found him not to be personally liable, even though his name was on the PACA license, and he had been a majority shareholder of the company, where Moza had presented only “conclusory and undetailed evidence” of his involvement and control over PACA trust assets.

Finally, the court concluded that a successor company that assumed and continued Tumi’s business after Tumi’s dissolution, was not liable where Moza failed to present any evidence of the “hallmarks of continuation,” especially evidence of continuity of ownership of the two companies.

As to (4) above, the judge, exercising his discretion, declined to award prejudgment interest to Moza, noting that PACA does not provide for prejudgment interest, and the contract between the parties (the invoices and documents of shipment) does not provide for it.

In conclusion, in what must be seen as a substantial victory for Moza, even though it did not get everything it wanted, the court entered judgment against Tumi and the above two individual defendants in the amount of $218,921.73, which was approximately 98% of Moza’s total claim, less interest.

Moza, LLC v. Tumi Produce Int’l Corp., et al., 17 cv 1331 (S.D.N.Y. 2019)

The Best of Intentions Meet the Federal Perishable Agricultural Commodities Act (PACA)

It is not uncommon for produce merchants to conduct business with each other. One company might buy produce from another one day, and sell produce to it the following day.  While on the surface such an arrangement is not a cause for concern, unforeseen circumstances – for example, a bankruptcy filing by one of the merchants – could present problems for companies with which it has this type of relationship.  

Earlier this year a federal appellate court in New York reviewed a case involving two produce merchants that regularly conducted business with each other.  The companies, which operated out of the same terminal in Buffalo, New York, each bought produce from the other for resale to its respective customers.  Both merchants issued invoices with appropriate trust preservation language, but intended for the dollar amounts of such produce sales to be about the same.  They intended that each would purchase about the same dollar amount of produce form the other, resulting in their payables offsetting each other, with no actual payments being necessary.    

Unfortunately for both merchants, that isn’t how things played out.  One of them (LPP) later filed for bankruptcy court protection.  The other (GP) found itself as both a creditor and debtor of LPP, never having been paid for the produce it sold to LPP.

The Second Circuit, affirming decisions below, ruled that the debts between LPP and GP could not be off set against each other.  The federal Perishable Agricultural Commodities Act (PACA), and cases construing it, direct that GP’s entire indebtedness to LPP ($204,774.88) was a PACA trust asset.  Such asset never become a part of the bankruptcy estate, and could not be offset by the amounts owed to GP by LPP. 

But it wasn’t all bad news for GP.  The other PACA trust creditors argued that because GP apparently did not file a proof claim in accordance with the claims procedure order entered by the district court, it had given up any rights it may have had to participate in the distribution of PACA trust assets to creditors with valid PACA trust claims. The panel concluded that GP’s (i) pre-bankruptcy PACA notices to LPP, (ii) proof of claim filed in the bankruptcy matter, and (iii) reasonable (but mistaken) expectation that it was entitled to a bankruptcy offset, was sufficient to preserve its right to a pro rata distribution from the PACA trust assets.

Paca Tr. Creditors of Lenny Perry’s Produce, Inc. v. Genecco Produce Inc., 913 F.3d 268 (2nd Cir. 2019).